All small businesses must file both federal and state income tax returns. However, the type of tax filing will vary with the business structure you use for your company. Some tax responsibilities are rather simple, such as those for a sole proprietorship, while others, like those for C corporations, are more complex. In all cases, consult with an experienced tax adviser before taking any final tax-filing action.

Sole Proprietorship

The simplest type of small-business structure, a sole proprietorship, also allows for the easiest way to file income taxes. The choices are also simple, since all profits pass on to the owner. The only form necessary is a Schedule C attached to the owner's personal tax return, a standard Form 1040. Sole proprietorships offer few tax "shelters" or other advantages. However, if you own a very small business, without outside investors, a sole proprietorship requires limited expertise to satisfy tax-filing requirements.

Partnerships

Partnerships are similar to sole proprietorships for tax purposes. The primary difference, a multitude of owners, means the partners will be taxed on company profits personally, based on their ownership percentage. For example, with a four-owner partnership earning net income of $100,000 annually, each partner, with equal ownership, receives $25,000 that must be included in their personal income for tax purposes. Partnerships must file a Form 1065 (U.S. Return of Partnership Income) with the Internal Revenue Service.

LLC

If your small business is a limited liability company (LLC), you can elect to be taxed like a partnership or S corporation, with profits passing through the business to the owners on a personal basis. You'll need to file an LLC tax return. Owners, called members in an LLC, will pay taxes on net profits at personal income tax rates. You can also choose to be taxed like a C corporation, but small-business owners tend to benefit from personal tax rates, which are usually lower than corporate rates.

C Corporations

C corporations pay taxes on their net income after all operating expenses are subtracted from gross sales. These businesses are considered to be "living entities" by the state and the IRS for tax purposes. They are taxed just like people, as they pay taxes on their net income. However, when they distribute their income to stockholders in the form of dividends, there is "double taxation." The C corporation pays taxes on its net profit, and its shareholders pay taxes on their dividends.

S Corporations

S corporations pay no taxes directly. Much like an LLC, partnership or sole proprietorship, they see their profits "passed through" to the shareholders and taxed as personal income. This eliminates the "double taxation" that occurs with a C corporation, since the S corp pays no taxes itself. Suitable for smaller businesses, S corporations allow stockholders, most of whom are usually active in company management, to avoid paying taxes on company profits twice.

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Pirraglia, William. "What Kind of Taxes Does a Small Business Need to File?" Small Business - Chron.com, http://smallbusiness.chron.com/kind-taxes-small-business-need-file-4082.html. Accessed 21 January 2019.

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